Santorum is Right on His “Manufacturing Zero Tax” (Or How to Show You are Not an Economic Idiot like Obama)

As a professional economist that me state that the parts of the mistakes in logic by mbecker908 in his Diary “Santorum is Wrong on His “Manufacturing Zero Tax” is understandable. It is common, even for economists, to only examine one part of a complicated system and come to completely wrong conclusions.

First, while mbecker is correct in stating that environmental restrictions (or more accurately the time and cost of compliance) is very harmful to manufacturers locating in the US, He (or she) is completely mistaken when he states: “Federal taxes, by and large, don’t impact manufacturing in a way that will accomplish an expansion of the manufacturing base and create jobs.” You sound like Obama who recently stated that increasing the supply of oil will have no impact on price. (so basically he is showing either bias or a complete lack of knowledge of basic economics)

I am going to explain why Santorum’s plan may make sense. First, let me provide some economic insight into two key issues of establishing a lower tax rate on one sector of the economy. There are two economic issues here that are well known in economics:

1) Misallocation of resources– Favoring one sector of the economy over another with lower taxes may cause a misallocation of resources away from more profitable industries to lower profit ones (Perhaps in his view manufacturing).

2) Tax distortions. This is the point he misses. Taxes change peoples’ behavior. However, each market/firm/industry is harmed to different degrees by high taxes. Taxes on some markets may cause little change in the behavior in those markets. The result is few lost jobs, little output lost, and little harm to consumers. In these markets, the government obtains tax revenue with little harm to the economy.

However, not every market is so unaffected. Some markets are very sensitive to tax policy and taxes in these markets can cause significant job losses (or transfer of jobs/firms/industries to other locations)

For example, one city whose travel market is made up mostly of business people flying for business meetings might find that it is able to collect significant revenue with little damage by taxing air travel. While another city’s travel market might be made up mostly of people traveling for pleasure. A tax on airline travel in the pleasure seeking travel market might cause serious reductions in air travel by budget conscious vacationers— causing layoffs, reduced airline travel, and reduced happiness among city residents.

In the latter case, the city might choose to reduce or even eliminate taxes on air travel–not to pick winners or losers but simply recognizing that in their particular market, taxing airfare is a poor method of collecting tax revenue.

Santorum is simply arguing that manufacturing is an industry that is sensitive to high corporate tax rates–thus causing firms to relocate outside the country.

Here is the conservative economics behind Santorum’s thinking.

Re-industrialization 101: “Get Government Out of the Way”

Allowing people to keep more of what they earn is a fundamental principle of conservatives. Manufacturing is a very competitive business. High taxation can cause companies to leave the country unlike other types of businesses. So simply allowing them to keep more of what they earn will promote the re-industrialization. From an economic viewpoint goods that are cheaper to produce, ship and deliver here in the US are now, instead, being produced overseas because of our high taxation (and as mbecker points out paperwork intensive/ time consuming EPA regulations.) This is not subsidizing or preventing competition like others have proposed. This is getting government out of the way.

This is sensible tax policy. The same way I support Gingrich and most conservatives who supporting lowering taxes on capital gains. Ssome think this is unfair, but it is smart economic policy to encourage people to invest in the creation of new businesses. Santorum simply applies this logic to the manufacturing business. Not a subside..simply a recognition that our economic performance might be enhanced.

Do I know how many jobs will come from this? No. But I know many companies have been looking to locate here in the US. I have heard corporate executives say that are not locating in the US because of our high corporate tax rates. I also know there are 7 million more working age people not working today than 4 years ago that could be utilized by companies to produce goods.

If they can do so profitably, companies will come. In fact, the more profitable they are, the more likely they are to come. (since only those companies that have really high profits will benefit from a 0% tax rate) Therefore, it is likely that these will be high paying jobs. Because while many people think of industry as low skill, this is not true. Many manufacturing jobs are now done with more automation and these require very high skill / high wage workers.

Besides the focus on regulations by mbecker, there are other issues keeping manufacturing out of the US as well. Many manufacturers actually pay the individual rate and not the corporate rate. Santorum’s reduction in these rates to 28% will help all companies who pay the individual rate including manufacturers. Additionally, the Obama administration’s failure to make appropriate trade agreements with other nations is also a big deterent to jobs here in the US. Moreover, our legal environment also discourages companies from locating here (Santorum also plans to address this problem as well)

Finally, if you are a Romney supporter, Romney’s suggests a plan that is likely to start a trade war with China. This is a far more dangerous proposition— A position that is far more likely to lead to economic catastrophe than simply allowing people to keep more of what they earn.